Robert Mondavi and The Wine Industry

Robert Mondavi and The Wine Industry

All things in moderation—with a few glorious exceptions. — Robert G. Mondavi1

On May 1, 2001, Robert Mondavi stepped down as chairman of the board of the company that he founded in 1966. He and his sons, Michael and Tim, had created one of the world’s finest and most innovative winemakers over the past 35 years. The company enjoyed considerable financial success too. Mondavi’s earnings per share had grown at a compound annual growth rate of 28% since FY1994 (Exhibits 1 through 3), and the firm’s market value now stood at approximately $600 million.

Michael Mondavi, who had served as CEO for many years, succeeded his father as chairman. Greg Evans, a Harvard MBA and 20-year veteran of the company, became the first nonfamily member to assume the role of CEO. In February 2002, the two men looked back on the past two quarters, and they assessed the challenges facing the company. The economy had faltered over the past six months, and the firm’s wine sales had softened. Australian imports posed a substantial and persistent threat, having grown roughly 30% per year since 1995. In addition, the global wine industry continued to consolidate. Many rival wineries had merged, and large diversified alcoholic beverage companies were making an aggressive push into the premium wine business. Meanwhile, Mondavi remained an independent company heavily dependent on the U.S. market. With these concerns in mind, Mondavi and Evans considered how to strengthen the firm’s competitive position.

The Global Wine Industry

Historians believe that the Mesopotamians first began to produce wine around the year 6,000 B.C. Wine played an important role in many ancient civilizations; Egyptians buried it in the tombs of the pharaohs to make the afterlife more enjoyable, and the Greeks paid homage to Dionysus, the son of Zeus and the god of wine. During the Roman Empire, people of all classes began to produce and drink wine throughout Europe. As the centuries passed, Europeans introduced their winemaking techniques to other regions of the world including the Americas, Australia, and South Africa.2

At the beginning of the twenty-first century, estimates of the size of the global wine industry ranged from $130 billion to $180 billion in retail sales. Vineyards produced and sold three categories of wine: table (less than 14% alcohol by volume), dessert or fortified (greater than 14% alcohol), and sparkling (champagne). Table wine accounted for an overwhelming share of the market. Industry participants divided the table wine market into five principal segments: jug or commodity (less than

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$3 per bottle), popular premium ($3–$7 per bottle), super premium ($7–$14), ultra ($14–$25), and luxury (more than $25). In the United States, jug wine sales had declined approximately 3% per year during the past decade, while premium wine sales grew 8%–10% per annum (Exhibit 4). By 2001, jug wine represented 38% of case sales in the U.S., but only 13% of total retail sales dollars.3 A similar shift toward the consumption of higher-quality, premium wines had occurred in many other non- European wine-producing nations as well as in the United Kingdom. Most nations in continental Europe continued to consume a great deal of inexpensive table wine. In fact, Western European consumers paid an average retail price of $4.80 per bottle in 2000, while North American buyers paid $7.20 per bottle on average.4

World Production and Consumption

There were over 1 million wine producers worldwide, and no firm accounted for more than 1% of global retail sales in 2001. However, market concentration differed substantially by country. Four firms accounted for 75% of the Australian market, while the top 20 firms controlled 75% of the U.S. wine industry. In contrast, the European market remained highly fragmented (Exhibit 5). Nevertheless, Europe still dominated the wine industry. Seventy-five percent of the world’s production and consumption took place in Europe, with three countries alone (France, Italy, and Spain) accounting for half of the world’s supply of wine (Exhibit 6). Industry observers often distinguished between these “Old World” producers in Europe, and the “New World” wineries in countries such as Australia, Chile, South Africa, and the U.S. The New World increased its share of the global market in the past two decades, while wine production declined dramatically in Europe.5

Global consumption had followed a somewhat similar pattern, with overall growth of 1%–2% per year since 1994 (Exhibit 7). Demand increased for premium wines, while consumption of inexpensive, lower-quality wine had fallen. Industry analysts expected the demand for premium wines to grow at 8%–10% per annum for the foreseeable future. These changing consumption patterns had created a great deal of excess capacity in Europe, while New World wineries continued to increase vineyard acreage in response to strong demand for high-quality wines.6

Winemaking in the New World differed from that in the Old World in many ways. Small family- owned vineyards produced most of the wine in Europe, while many larger publicly traded firms competed in New World markets. European governments often provided subsidies to these small vineyards. Moreover, many European families continued to make their own wine for household consumption, while Americans and Australians purchased nearly all of the wine that they drank. The New World producers invested much more heavily in technology and automation. These investments and innovations enabled them to enhance the consistency and the quality of their wines and to reduce operating costs considerably. For instance, New World producers relied increasingly on machines to harvest the grapes in their vineyards, while most European wineries continued to handpick their entire supply of grapes. The New World also had more extensive and well-developed markets for grapes, making it easier for wineries to find multiple avenues for sourcing their most critical inputs.7

In Europe, strict regulations controlled many aspects of winemaking including planting, irrigation, classification, and labeling. The French government imposed the most severe restrictions. Often, it took legal action to protect the nomenclature created centuries ago. For instance, wineries only could designate sparkling wine as “champagne” if they produced it using three grape varieties grown in the region with the same name. Fewer controls constrained production in nations such as the U.S., Chile, and South Africa. The Australian industry had particularly loose controls. The producers could label wines based upon the sourcing of grapes from broad geographical regions.8

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